JUDY WOODRUFF: The campaign to toughen financial regulation in the U.S. reached its climax today. It came nearly two years after the financial meltdown that triggered the current recession.
JUDY WOODRUFF: The financial overhaul bill was one of the chief items on the president’s agenda. And he signed it with fanfare, before an audience of 400 lawmakers and others.
PRESIDENT BARACK OBAMA: It will finally bring transparency to the kind of complex and risky transactions that helped trigger the financial crisis. Shareholders will have a greater say on the pay of CEOs and other executives so they can reward success instead of failure. And finally, because of this law, the American people will never be asked again to foot the bill for Wall Street’s mistakes.
BARACK OBAMA: There will be no more tax-funded bailouts, period.
JUDY WOODRUFF:Mr. Obama also billed the new law as the strongest package of consumer financial protections in history.
BARACK OBAMA: And that’s not just good for consumers, that’s good for the economy, because reform will put a stop to a lot of the bad loans that fueled a debt-based bubble. And it will mean all companies will have to seek customers by offering better products, instead of more deceptive ones.
JUDY WOODRUFF:Democrats, led by Senator Chris Dodd of Connecticut and Congressman Barney Frank of Massachusetts, pushed the bill to passage. But Republicans stayed away from the signing ceremony and remained skeptical.
Senate Minority Leader Mitch McConnell said today, the new law is bad for small business.
SEN. MITCH MCCONNELL, R-Ky., Minority Leader: When you cut through all the talking points about what financial regulation will do, the practical, real-world effect of this bill in the near term will be job loss.
That’s the real story here. For more than a year-and-a-half, the president and his Democratic allies on Capitol Hill have pushed an anti-business, anti-jobs agenda on the American people in the form of one massive government intrusion after another.
JUDY WOODRUFF:Among other things, the new law will give the government new power to break up firms that pose a major risk to the economy, bring the complex financial transactions known as derivatives under federal regulation, and create a Consumer Financial Protection Agency under the Federal Reserve.
This afternoon, a White House spokesman said there’s no decision yet on who would lead the agency. Elizabeth Warren is considered a leading contender for the post. She’s currently chair of the congressional panel that oversees TARP, the bank rescue fund. But opposition in the Senate could make her confirmation difficult.
For more on the new law and how well it addresses the causes of the financial crisis, we get two views.
Phillip Swagel served as the Treasury Department’s chief economist under President George W. Bush from 2006 to 2009 — he is currently a professor of finance at Georgetown University — and Lynn Stout, a professor of corporate and securities law at UCLA, whom we have talked to regularly since the crisis hit.
We thank you both for being with us.
Phillip Swagel, to you first.
Is this a significant step forward, an improvement?
PHILLIP SWAGEL, professor of finance, Georgetown University: It is. There’s a lot of good in this bill. Not everything is good, and a lot depends on how the bill is implemented by the regulators, including the same regulators who didn’t prevent the last crisis. But there are some good elements in it.
JUDY WOODRUFF: And, Lynn Stout, same question. Is this a positive thing, on balance?
LYNN STOUT, corporate and securities law professor, UCLA: Well, I think it looks like a step forward, but the reality is, in a lot of ways, the Congress just kicked the can down the road and deferred issues.
It’s going to remain to be seen whether this proves to be effective. A lot is going to depend on what happens in the future in terms of the agencies being created and that are being asked to police against practices actually being able to do their jobs.
JUDY WOODRUFF: All right, well, let start out with what you think will be effective.
Phillip Swagel, what do you think is going to work in this legislation?
PHILLIP SWAGEL: Right.
I mean, work — I would say what would be helpful is giving the Fed in particular the ability to get financial information from any firm. So, a picture like AIG, that had a subsidiary in London, that was basically beneath the radar. Now the Fed will have the ability and the mandate to find out about those firms. So, that’s good.
The transparency for derivatives, bringing those complex transactions into more daylight and giving regulators the ability to look at them, that’s also good.
JUDY WOODRUFF: They’re going to be traded on — some of them will now be traded…
PHILLIP SWAGEL: Some of them, that’s right.
JUDY WOODRUFF: On open exchanges.
And, Lynn Stout, what do you see that’s positive in here, before we get to the other side?
LYNN STOUT: Well, I think one of the most promising developments will be the creation of the new Consumer Financial Protection Agency, although the key thing, the key question there is, who is going to be put in charge of it?
The first person to be made the head of this consumer financial protection commission is going to have a definitive impact on whether the agency is effective or not. The leading candidate is clearly Elizabeth Warren. The agency was her idea. It is her brainchild. She’s a longtime consumer advocate. She would be probably a very effective watchdog.
But, as you can imagine, there’s a lot of pushback from the banks. They don’t want a watchdog. They want a lapdog. So, it remains to be seen whether the administration will have the courage to follow through on this agency and put it in hands that are going to make sure it is really effective.
JUDY WOODRUFF: Phillip Swagel, how do you see this consumer protection bureau?
PHILLIP SWAGEL: It is one of those things that could good or it could be harmful, and it really depends on how it is implemented.
And the key, in my mind, is that there’s a trade-off between protecting some people, but harming others, that, if you crack down too hard, then that means that some people will be protected, but others won’t get a loan or won’t get a credit card. And that has negative effects. And it’s hard to strike the right balance.
What I think is the most important is that whoever is in charge of this new agency focus on the substance, not go for quick hits or easy lawsuits or the TV cameras, but really focus on the substance.
JUDY WOODRUFF: So, both of you, I think, are in agreement that what matters here is who runs it and how it’s run.
PHILLIP SWAGEL: That’s right.
JUDY WOODRUFF: What about the — this — the new power for the government to take over firms, Lynn Stout, that are in danger of threatening the whole financial system?
LYNN STOUT: I’m much more skeptical about that, about whether that provision will be of any real use.
If the government was very good at anticipating and preventing problems on a case-by-case basis, I don’t think we would be here today.
JUDY WOODRUFF: What — can you expand on that?
LYNN STOUT: Yes.
In effect, the government is saying, we will wait until the patient is already sick, and then we will rush him to the operating table and fix them up. What may have been a missed opportunity was the chance to use this financial crisis to pass some very simple, straightforward, strict legal provisions that would have prevented these big banks from getting in trouble in the first place.
And rather than do that very clearly, what the legislation does instead is say, we will give some new powers to the Federal Reserve to take action if they think they see a problem. And they just don’t have a good track record on seeing problems.
JUDY WOODRUFF: And how do you see this piece of it?
PHILLIP SWAGEL: Yes, I agree. It’s very difficult for a regulator to see a failure before it happens.
What the bill will do is give more power after a failure takes place. So, Lehman Brothers was insolvent, but the federal government, the Treasury, my old boss Hank Paulson, did not have the legal authority to save the firm or even to cushion its dissolution.
And the new bill will give the treasury secretary and the FDIC vast new powers. They can take over a firm. They can really do anything, put public money in, favor some people over others. And that’s an awesome power that can be used for good or for bad.
JUDY WOODRUFF: And you said a minute ago there were several things that were troubling to you in here. This is one of them.
PHILLIP SWAGEL: This is one of them. And I think it very much depends on how it’s used, that it gives so much flexibility.
And I worry that the instance we have seen of this has already been used for mischief. And this is in the bankruptcies of General Motors and Chrysler. The federal government, using the TARP, essentially did something akin to non-bank resolution, the ability to take over a company.
The TARP was used essentially to put in money, went into the auto companies, and out to the United Auto Workers. That’s probably not what people had in mind with the TARP.
JUDY WOODRUFF: Lynn Stout, what else is there in this law that gives you pause?
LYNN STOUT: Well, the treatment of derivatives, I think, was a really critical part of the law that not many people understand, but it’s absolutely essential, because, essentially, the creation of a derivatives market took what would have been a kind of relatively confined consumer finance crisis and magnified it many times, into a huge speculative bubble.
And the bill, originally, when it came out of the Senate Agriculture Committee, was quite strong and looked like it was really going to rein in the derivatives market. The version that President Obama has signed seems to address the problem by having a requirement that derivatives be traded on clearinghouses and exchanges, because, when they are traded on clearinghouses and exchanges, history has taught us, we really don’t have these kinds of speculative bubbles and problems.
But there’s a loophole, there’s an exception in the bill that says that people can deal in derivatives off of the exchanges and clearinghouses if they’re customized and they’re not accepted for trading. So, we’re going to have to wait and see just how good Wall Street is at exploiting that loophole.
It could be that, a couple of years from now, we have the same problem we had just two years ago.
JUDY WOODRUFF: And, in brief, Phillip Swagel, you said a minute ago you’re not as concerned about that.
PHILLIP SWAGEL: Well, I think there’s an improvement in the transparency. You know, underlying the crisis were bad lending decisions. Banks made bad loans. People bought houses they couldn’t afford.
And derivatives made it worse, and the transparency will help, but, ultimately, we’re all human, and it’s hard to avoid every single crisis.
JUDY WOODRUFF: I want to ask both of you about the Republican complaint — and I will start with you, Phillip Swagel — that this law ultimately will — will keep businesses from hiring, that it will prevent the creation of new jobs.
PHILLIP SWAGEL: I mean, again, there’s a trade-off, that the more you protect and the more you crack down, the trade-off is that there is some activity that will not happen, some loans that will not be made, some credit that will be more expensive. People will face higher interest rates. It’s hard to find that balance, but there will be an effect.
JUDY WOODRUFF: Lynn Stout?
LYNN STOUT: I have to say I think the charge that this reform is going to hurt jobs is absolutely ridiculous.
It was the elimination of regulation that led to the loss of more jobs than — since — than we have lost since the Great Depression. This is — there is absolutely no evidence that moving our system back, and just part of the way, toward the regulations we used to have is going to hurt the economy or job creation.
JUDY WOODRUFF: And final to both of you.
Lynn Stout, is this legislation likely to prevent another meltdown?
LYNN STOUT: I wish I could say the answer is yes. I think it will clearly put it off until after the election. But whether it will really prevent another meltdown, I’m — I’m not very — I’m not very optimistic there, although the bubbles we can expect to see in the future may be smaller.
JUDY WOODRUFF: Phillip Swagel?
PHILLIP SWAGEL: You know, I just don’t think that the removal of regulation was at the heart of this crisis.
When President Clinton signed the bill changing regulation in the late 90s, I don’t think President Clinton was at fault here. And this will help prevent crises, but I think it’s impossible to prevent all crises.
JUDY WOODRUFF: All right. We’re going to leave it there. Phillip Swagel, Lynn Stout, thank you both.
LYNN STOUT: Thank you.